As if trade disputes, fear of bankruptcy and competing against online retail giant Amazon aren’t enough of a challenge for retailers, they, and in many cases, their private equity owners, have to pass another test.

In its South Dakota v. Wayfair decision, the U.S. Supreme Court granted states greater power to require out-of-state retailers to collect sales tax on sales to in-state residents. Now, retailers of even modest size that sell goods or services to customers across state lines need to comply with states that have “economic nexus” standards that require sales tax compliance in states where customers are located.

From a consumer perspective, shopping may become more expensive at these online retailers, causing them to reconsider their loyalty to their favorite online stores. After all, 51 percent of consumers consider how much they are charged in sales tax before placing an order online, according to BDO’s Consumer Beat Survey.

Private equity firms’ retail portfolio companies, as well as PE firms looking to acquire retailers, need to determine whether Wayfair’s impact on their business is large enough to sway a potential investment or current business operations. If a retailer derives a substantial amount of receipts from customers in states that have adopted an economic nexus standard, is the financial impact of Wayfair significant enough for the retailer to consider adjusting its market strategy? PE firms also need to factor into their investment decisions the administrative burden and compliance costs that result from having to file in more jurisdictions. Luckily, PE firms still investing in the consumer and retail segment and their portfolio companies have options to adapt to the changes the Wayfair decision brings.

An Added Tax Burden for Retailers
With the Wayfair decision, each state must determine its respective sales and use tax economic nexus threshold that requires companies to collect this tax. Prior to the Court’s decision, over a dozen states were already deriving receipts from customers that had made purchases from out-of-state sellers. Over the course of six months since the Wayfair case was decided, economic nexus standards have either been enacted or become effective in 37 states with most becoming effective on October 1, 2018. The trend continues with California and Texas’ adoption of economic nexus standards as late as December 2018 of $100,000 and $500,000, respectively. As of today, the nine states currently without a specific economic nexus statute are in various stages of consideration dependent upon their 2019 legislative sessions.

Tens of thousands of businesses are also likely required to file in new jurisdictions where they sell their products. But there are many solutions they can implement to ensure compliance: Businesses can administer the compliance either through online marketplace vendors providing the services themselves, or through a partner. In some cases, they can outsource the sales tax function.

This decision doesn’t only impact U.S.-based vendors. Retailers located outside the U.S. that sell goods or services to customers within the states are now required to collect sales and use tax.

The Road to Compliance
Retailers that understand how their products are sold throughout different states are best prepared to comply. Those that don’t need to quickly create a system that tracks this activity. There are various steps companies can take to prepare.

These include:

Communicating the changes to internal and external stakeholders.

Maintaining or investing in an accounting or billing system that can handle multi-state and local sales taxes.

Identifying which potential sales, use, and state income tax liabilities the company may be exposed to, including both past and present liabilities.

Creating exemption certificate processes (B2B retailers).

New Rules Ahead
Following the Wayfair decision, several states have embarked on writing up new rules on the taxation of out-of-state businesses that sell to their residents. They must, however, abide by two key limits:

States may not treat out-of-state retailers worse than in-state retailers.

They may not impose undue burdens on interstate commerce.

While the full impact of the Wayfair decision is still being unpacked, retailers and their private equity owners should begin considering potential options and strategies to comply effectively.

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about the author

Scott Hendon CPA

National Private Equity Industry Group Leader & International Private Equity Industry Group Co-Leader

Scott has more than 31 years of experience providing tax consulting services to a wide range of energy, high tech, manufacturing, distribution, and retail clients. He is the National Leader of BDO’s Private Equity Industry Group and the Co-Leader of the BDO’s International Private Equity Industry Group.

about the author

Katherine Gauntt

Senior Manager, STS-SALT-Sales & Use Tax

Katherine is a senior manager in BDO’s STS-SALT-Sales & Use Tax practice and has had a dedicated career in sales tax since Quill was decided. For more information on how changes to the online sales tax could affect your business, contact Katherine Gauntt at kgauntt@bdo.com.

about the author

Rocky Cummings JD, CPA

Tax Partner

Rocky is the head of BDO’s National Multistate Tax Services. He has over 27 years of multistate tax consulting experience and works with companies in multiple industries, including: broadcast media, transportation, manufacturing, banking and financial services, retail, and high technology industries.